US swing to right restrains Graseby

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The Independent Online

A tail-off in US environmental legislation and the further decline in defence orders have combined to restrain interim profits growth at Graseby, the electronic testing group.

But the chief executive, Paul Lester, said yesterday that the environmental problems were only temporary, while defence was now on a plateau after several years of decline. He said he expected the second half to be broadly similar to the first, which saw pre-tax profits grow from pounds 4.96m to pounds 5.37m in the period to June. Mr Lester's optimism helped the shares add 2p to 147p yesterday.

First-half earnings per share held steady at 5.8p, out of which Graseby is paying an unchanged interim dividend of 2.7p.

The move to the right in the US Congress after last year's elections has stymied moves by the Clinton administration to further curb environmental emissions, leading to fewer orders for testing equipment.

Specifically, Graseby has been hit by the near-completion of a number of low-margin contracts for monitoring US power stations' smokestacks. That led to a 25 per cent fall in sales in the environmental division, after strong shipments in the early part of last year were not repeated, and a more than halving of profits to pounds 643,000 from pounds 1.43m.

In the technology division, two-thirds of which is defence-related, profits sank from pounds 1.05m to pounds 722,000 as a result of a further reduction in sales of monitors for chemical warfare testing. A classified contract worth around pounds 2m with the Ministry of Defence has also been cancelled, but Mr Lester is confident that the cost to second-half profits will be covered by compensation.

Graseby's operating profits, which advanced from pounds 5.36m to pounds 5.51m, were kept moving ahead by strong performances in the group's two other divisions, medical and product monitoring. In the former, sales shot up 20 per cent, boosted by strong demand from National Health Service hospitals using up their budgets in the last quarter of their financial year between January and March. That accounted for more than half the rise in divisional profits from pounds 1.85m to pounds 2.74m.

Graseby is tendering for a "substantial, long-term" order from the US army for chemical monitors for tanks and, with an American partner, may next year enter the European market for checking vehicle emissions. Future growth will also be underpinned by the expected need to modify some of last year's smokestack testing equipment and new business for the North American pulp, paper and petrochemicals industries.

In the meantime, having brought gearing down from 30 per cent last December to 23 per cent at June, the company is on the look-out for something to buy. "We would like in the next 12 months to make some bolt-on acquisitions in medical, product monitoring and environment," Mr Lester said.

Turnover in the latest period slipped from pounds 47.4m to pounds 45.1m.